The downgrades of corporate bonds by Chinese rating agencies triple

Downgrades to China’s national corporate bond ratings have more than tripled this year, underscoring Beijing’s efforts to reduce risk in the country’s $ 17 billion credit market following several high-profile defaults. publicized.

International rating agencies and fund managers have long criticized China artificially high corporate credit ratings and low default rates, indicating a lack of transparency and the assumption that the government will bail out struggling companies.

But 366 bonds were downgraded in the first four months of 2021, up from 109 in the same period a year ago, according to data from information provider Wind.

The increase follows a warning in November from Liu He, Chinese vice premier, that Beijing has “zero tolerance” for the wrongdoing of Chinese people. series of faults by public enterprises.

Regulators have pressured debt underwriters, national rating agencies and auditors to encourage faster disclosure of risk, analysts said.

Among the hundreds of downgrades this year were bonds issued by HNA, the former acquiring conglomerate that has struggled with debt and liquidity issues for nearly five years, and Tsinghua Unigroup, a major investor in computer chips facing questions about bond repayments since 2018.

Charles Chang, Greater China Country Leader at S&P Global Ratings in Hong Kong, said poor risk disclosure by Chinese companies “is starting to improve.”

“If this regulatory push works, you should see an increase in timely actions that signal the underlying distress. . . it doesn’t mean that there is an increase in distress, it just means that there is an increase in the indication of this distress, ”Chang said.

S&P noted that more than 80% of local ratings of non-financial issuers in China were rated double A. Below this rating, Chinese groups cannot issue publicly traded debt securities.

Five national rating and audit firms contacted by the Financial Times did not respond to requests for comment.

Chinese regulators have struggled for years to improve the transparency of the country’s corporate debt market. Increasing scrutiny by regulators has become acute for indebted state enterprises, analysts said.

Attention has increased since a default by state-backed Yongcheng Coal and Electricity in November sent shock waves through the Chinese financial system.

Some of the flaws could also be due to economic damage from the coronavirus pandemic, analysts said, despite China’s return to pre-pandemic economic growth levels in the last quarter of 2020.

Xiaoxi Zhang, analyst at Gavekal Dragonomics, said Chinese executives have chosen “hidden debt” as a priority this year and are working to change market perceptions that many companies have an “implied guarantee” that the the state would bail them out.

“The government wants to take advantage of the strong growth momentum of the post-Covid rebound to address structural issues,” she wrote in a research note.

“But it is also because the current credit crunch and the withdrawal of favorable economic policies could lead to greater financial strains if the hidden debt is not well managed.

Chang of S&P, however, pointed out that default rates in China remain relatively low. “China’s default rates would have to double or triple to reach the level you see in the United States, Europe and emerging markets,” he said.

Additional reporting by Sherry Fei Ju in Beijing

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